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Index Wrap, Sunday, 12/07/2003

Doji Week

by Jonathan Levinson

HAVING TROUBLE PRINTING?

The Nasdaq hit 2000 and the only panic was from bulls to buy the
top. The indices retreated shortly thereafter, and closed the
week lower by 1.1% at 1937. On Friday, the Dow lost .7% or 68
points to close at 9862, the S&P 500 dropped 8.22 or .8% to close
at 1061.50, and the Nasdaq lost 1.6% or 31 points.

Year to date, the Dow is up 18.2%, the S&P 500 20.6% and the
Nasdaq 45.1%.

It was a week in which technical traders got whipsawed in both
directions, and those with a bias in either direction were spared
some of the false signals. Wednesday's high was not revisited,
but the Thursday afternoon ramp job, fueled entirely by three
nearly symmetrical buy programs in one hour, nearly did it. The
selloff following INTC's earnings report took the futures back
down afterhours, and Friday never came close to breaking above
Thursday's close.

Volatility printed a fresh set of lows up to Wednesday, with the
VXO spending most of Monday and Wednesday below the 16 level.
Sentiment was overwhelmingly bullish, even amongst many bears.
It appeared to be an inevitability that the Dow would print
10,000 and the Nasdaq 2,000, and the selloff that followed the
Naz 2K touch was as much from bearish relief as from bullish
profit-taking. The VXO closed on Friday at 17.34, near a
weeklong high, and the various support breaks no doubt awoke some
bulls to the significant downside risks from these lofty heights.

Nevertheless, the higher high on the Nasdaq muddied the weekly
cycles somewhat, actually printing a buy signal but setting up a
possible bearish oscillator divergence. The bulls used a great
deal of firepower on Wednesday, and the bears only appeared to
realize it after the INTC disappointment at Thursday's close.

Weekly COMPX candles

The drop on the weekly candle from a new high printed a
gravestone doji for the week, portending further downside to
come. This candle implies an abrupt rejection at the high and is
a reversal signal. However, the close above last week's lows
could result in either consolidation or further selling, and it
will take a trendline break below 1930 confirmed by a failure
below 1900 to suggest that we've indeed seen the top. We all
know the bear wedge off the March lows by now, as well as the
bearish divergences on the 10 week stochastic. This week's
decline confirmed the sell signal on the weekly Macd, however,
and this suggests that the Nasdaq is putting in a rolling top at
current levels. A retest of the high would not be incompatible
with that interpretation, and wedge resistance is now up at 2030.
The oscillators suggest that such should not occur, and so next
week promises to be enlightening as to the fate of this year's
rally.

Weekly INDU candles

The Dow came close but did not reach 10,000. It was stronger
than the COMPX for the decline from Wednesday, and on the weekly
chart its Macd sell signal is not fully developed. The rise back
to the highs left us with the same upward tilt on the 10 week
stochastic as we saw on the COMPX, and we cannot rule out more
upside for next week. Nevertheless, the stochastic is still
diverging lower, and suggests a break of the lower rising wedge
trendline.

Daily OEX candles

The daily chart of the OEX shows a rounding top at the current
highs. If you squint, you can see the shooting star doji on
Wednesday, one of the most bearish candles you'll see. The fact
that the break above 525 resistance did not cause a short
covering panic for longer than part of one session indicates the
existence of serious overhead supply, and leaves bears breathing
easier. But former resistance at 518-520 is now support and
should give bears a run for their money. The daily cycle
oscillator upphase, responsible for that upward twitch in the
weekly stochastic above, still has room to run and could see a
retest of the 528 highs. But the Macd histogram suggests that
Wednesday may have been the top, and any further selling from
here should be enough to turn the stochastic back down. If so,
that would agree with the bearish divergences on the weekly
cycles, and the ensuing downphase should do some damage.
Provided that 528 does not get broken, that's what I expect to
see.

20 day 30 minute chart of the OEX

The 30 minute OEX shows the wedge break with Wednesday's outside
reversal day, but the selling that has ensued is difficult to
read. On the one hand, it could be a head and shoulders top,
with a neckline at either 525 or 522. On the other, a bull flag
with resistance 526, support 522. Above 526, I expect to see the
30 minute cycle oscillator reverse to an upphase, and 528 will be
within sight. Below 522, the daily cycle upphase should abort,
and the bulls will have a problem.

Daily QQQ candles

The Qubes never printed a higher high this week, a clear bearish
divergence from the broader Nasdaq. Friday's close near the lows
was ugly but did not break any of the rising trendline supports.
A decisive break of 35 will be the first sign of trouble, but
34.30 is far more important, below which I expect to see the
failure of the daily cycle upphase. Given the extent of the
bearish oscillator divergences, the next downphase should pack an
"I told you so" punch. Until then, however, the pullbacks in
this daily cycle upphase look merely corrective.

20 day 30 minute chart of the QQQ

My "corrective" comment is exemplified by the bull wedge
interpretation on this 30 minute cycle downphase. However, a
break below 34.75 could be construed as a neckline break, and
again, we'll wait for a confirmation at 34.30 to be certain. The
30 minute cycle downphase should be good for another few hours of
downside, but if it's merely sideways, we'll watch for a bull
wedge breakout to the upside above the trendline at 35.20.